This menu from the 1970’s shows the lunch special at a whopping $1. Today that lunch special would easily be $12 – before tax and tip.
That $1 lunch that costs about $12 today means an annual increase in cost of 6.5% over the last 40 years. Here is the scary part: that $12.42 at 6.5% over the next 20 years means that lunch special will cost $43.76!!
There are two very important lessons to be learned here:
1. When we ask our clients what they feel the biggest risks are to their long-term financial plans, the most common answers have to due with market volatility and sometimes just President Trump in general! In reality, the biggest risk is often inflation. It can be a difficult risk to really make sense of because it’s so slow moving. But it’s the consistency and the magic of compounding (the 8th wonder of the world) that make inflation one of the biggest risks over the long term.
2. Inflation is not the approx. 2% that the Government tells us it is. The Government’s CPI inflation number excludes: housing, clothing, food and energy. That’s where the other 4.5% inflation comes from. Guaranteed sources of income like CPP, OAS and employment pensions only increase at CPI rate of inflation, likely because they could never afford the actual rate of inflation!
We are not saying that inflation WILL be 6.5% going forward. But we are saying that could very well be closer to the truth than 2% AND that people should spend much more time worrying about that risk than market volatility.